Accounting Exam

GAAP Assumptions

1. Business Entity Concept: A businesses transactions are separate from its owners

2. Continuing Concern Concept: Assumes that a business will continue in the future if if preforming poorly

3. Time Period Assumption: A businesses life is divided into time periods

4. Monetary Unit Assumption: Data is kept using a monetary unit

GAAP Principals

1. Cost Principle: The value of an item stays the same amount as it was purchased for even if it decreases

2. Objectivity Principle: Two different people should be able to calculate the same amount. (no personal feelings involved)

3. Conservatism Principle: Do not anticipate future loss or growth

4. Materiality Principle: Must include all information related to the business even if negative

5. Consistency Principle: Businesses have to keep things consistent within their records.

6. Reevaluation Principle: Allows accountants to change the value of assets based on changes in market prices

7. Revenue Recognition Principle: Revenue must be recorded the time the transaction was made

Accounting Cycle

1. Analyze Transactions

2. Journalize Transactions

3. Post to Ledger accounts

4. Prepare an unadjusted trial balance

5. Adjusting entires

6. Create a worksheet

7. Create an adjusted trial balance

8. Closing entires

9. Post closing trial balance

Accounting Equations

A = L + OE

L = A - OE

OE = A - L

Source Documents

These are documents that confirm a businesses transactions (Cheques, Bills, Receipts, etc). Relates back to objectivity principle

Debit/Credit Theroy

Debits on the left, Credit on the right

Cash Sales Slip

A source document that proves a transaction paid with cash

Sales Invoice

Shows that a sale was made on account

Purchase Invoice

Shows a purchase made on account

Cheque Copies

Shows a transaction made with a cheque/cash

HST (Harmonized Sale Tax)

HST - 13% (5% GST & 8% PST

How to find an error (4 tests)

1. If the trial balance is a multiple of 10, an addition error has likely been made therefore re-add the trial balance columns

2. Check that the values in the journal and the trial balance are equal

3. Divide the trial balance difference by 2 and search the ledger or journal for that value and make sure it was debited or credited correctly

4. If the trial balance difference is a difference of 9, a transposition error (order of digets) or a misplaced decimal point.

Depreciation

A reduction in value of an asset

Aka: Amortization (Reduction of value to zero)

Applies to long term assets

Straight Line Depreciation

This method assumes depreciation is the same every year.

Formula: (Cost of assets - Salvage Value)/Useful life of asset

Adjusting entry: straight line depreciation

Depreciation Expense (Income Statement): Represents depreciation just this year

Accumulated Depreciation (Balance Sheet): Represents depreciation from all previous years

Declining Balance Depreciation

This method assumes the asset is used more in its early life then later on

Formula: Original capital cost - (Capital Cost x CCA Rate)

Adjusting entries: Declining Balance Depreciation

Depreciation Expense (Income statement): Represents depreciation just this year

Accumulated Depreciation (Balance Sheet): Represents depreciation throughout an assets life

Half Life Methodm (Declining Balance Depreciation)

1. Divide the first year capital cost of an asset by 2 and calculate declining balance depreciation from there

Real Accounts (closing entries)

Accounts that will never be closed:

• Assets

• Liabilities

• Capital

Nominal Accounts (closing entires)

Accounts that will be closed next year:

• Revenue

• Expenses

• Drawings

Closing Entires

1. Depreciation Expense (optional)

2. Supplies Expense (optional)

3. Revenue

4. Expenses

5. Net Income

6. Drawings

Merchandise Businesses

A businesses that buys merchandise and sells them

2 Types:

1. Wholesaler: Buys. merchandise from manufacturer, sell to retailer (Costco)

2. Retailer: Buys merchandise from wholesaler and sells to public (Footlocker)

Inventory Formula

Beginning Inventory + Cost of goods purchased - Cost of goods sold = Cost of ending inventory

Cost of goods sold formula

Beginning Inventory + Cost of goods purchased (add Freight In) (subtract returns) - Ending Inventory

Beginning Inventory + Cost of Goods Purchased = Inventory available to sell

Gross Profit Margin

Sales - Cost of goods sold

Periodic Inventory System

An accounting method where businesses do not update merchandise inventory account until the last day of the fiscal cycle

Flaw: Time consuming since physical count is required and does not provide a current count of inventory

Freight In

An expense for shipping of products

Sales terms

Net 30 - Full amount is due in 30 days

Net 60 - Full amount is due in 60 days

2/10, n/30 - 2% discount if paid in 10 days or full price in 30

1/15, n/60 - 1% discount if paid in 15 days or full price in 60

Perpetual inventory system

An accounting method where businesses keep an up to date log of transaction/inventory.

Purchase account turns into Merchandise Inventory

Financial Position

A summary of items owned owed, and net worth. (Assets, liabilities, capital)

Unwritten Accounting Rule

At least 2 accounts are impacted during a businesses transaction

Equation Analysis Sheet

Shows a companies financial position in chart form